This is just not possible… period. Someone who has an estate most likely does not need life insurance.
We hear things like “Life Insurance is an excellent idea for estate planning. Life Insurance is needed all your life i.e. till the time you die. Life Insurance gives you guaranteed or almost guaranteed returns.” This is absolutely ridiculous, rubbish, has zero merit and is nothing but cheap marketing gimmicks.
Life Insurance is NOT for the “have”
There is no financial reason why one should have life insurance under the following circumstances;
- A family having substantial liquid estate; i.e. liquid wealth comprising of equities, bonds, deposits and similar type of liquid or near-liquid investments of say 10-20 crores or more which are more than adequate to take care of families requirement for their entire life. Why would any member of such family need a life insurance contract to further their cause? Such estate figure naturally needs to be in tandem with the lifestyle of a family in question. Insurance or additional insurance will come at a cost which would have to be borne out of current estate. Is it really worth it?
- A family has substantial real estate (other than primary home & office) and other investments in other art, rare collectibles, old jewellery or anything else of great value which can be liquidated as needed. Again this liquidation is more than adequate to survive the lives of the surviving members of the family
- A family who is in a position to have a large inheritance. This inheritance is due to materialise shortly or is already in the process or already has materialised.
- A family who has adequate divisible share in joint family assets. In addition there may also be an ongoing payout to such family from family business or assets. Their shareholding is such that it can be transferred for cash realisation.
- A family where both spouses work are well qualified and either of them is capable of taking care of surviving family members and their needs. This is a delicate situation though and a professional ratification may be a good idea.
- A person who has obtained & exercised a large quantum of stock options by virtue of job or profession. This is again situational and the assumption is that the stock options will yield profits that will be adequate for the lifetime of the family in question.
- A retired person who has enough assets to take care of his post-retirement cash inflows.
- A single person who does not have any financial dependents.
- A housewife and children. In the event any of them go away there is no financial loss to the family or to earning members of the family.
- Where earning members of family need no hedge against protecting life risk & earnings, because they have a special investment or fund or trust set up to protect their family.
- Key persons or popularly known as keyman insurance – While this is not a bad idea how much can an insurance contract really help and to what extent? There is no replacement to loss of life and such contracts come at a price. This point is both debatable and situation specific.
In any of the above situations if one is not there the surviving family obviously has access to the wealth and thus where is the need for any life insurance, unless it is for some other vicarious pleasure?
Life Insurance is only for the “have not”
Life Insurance is a risk management tool. Should you die, your family would have access to some “corpus” which they can invest safely, pay off loans if any and take care of themselves. That is all that there is; nothing more.
If you do not have this required “corpus” you need to have life insurance. Example to clarify: Say a family needs about Rs. 50,000 monthly to maintain lifestyle and spouse is about 40 year of age. Then the life insurance corpus needed is about Rs. 1.5 crores. Here’s how: 50k monthly means 6 lacs p.a. If the bank deposit rate was 8% then you need to invest 75 lacs. In other words 75 lacs invested at 8% would give you 6 lacs p.a. Double this figure to counter inflation, thus 75 lacs becomes 150 lacs or 1.5 crore. If one wants to be more cautious triple it and then corpus needed would be 2.25 crores. If there is a loan the amount of loan may be added to the corpus amount needed. Note: This is not a generalisation and would differ by person and family. A term insurance plan would be the cheapest and best strategy for this life risk mitigation. Anything said or claimed beyond this is sham marketing.
With respect to life insurance often people do not have an idea of what they need, whether they really need and if they do, whether they have life insurance that is adequate. Hence you hear general statements like “everyone needs life insurance; it is a critical necessity etc”. But this is not the truth.
Dynamic Testing
If a Financial Planner tells you that you do not need life insurance; consider you have arrived. There are two things to note; Life Insurance is a risk management tool and just like health check-up’s one must regularly get their financial position tested to find out if they do or do not need life insurance. If yes how much or by how much is it now up or down? Yes, life insurance is a dynamic financial need and it changes based on age and circumstances. The general rule being; “As wealth increases the dependency on life insurance reduces.”